Proportional risk management

Let’s talk about 2% risk rule

Here is why you should always follow the proportional risk management rule. Let’s consider two simple examples:

1. Proportional growth: Trading on $10000 using proportional risk of 2% per trade
2. Linear growth: Trading on $10000 using fixed lotsize of 0.1Lot and 200 pips StopLoss (= 2% of initial balance)

Just for this example we will simulate a sequence of 100 wining and 100 losing trades (n=0 to 100).

We can clearly see that proportional risk management not only results in a higher and faster balance growth, but also in a lower total drawndown. In case of fixed lot size the account would blowup after 50 losing trades. So why traders do not use this simple rule? Because this involves some calculation and people do not really know how to do it properly. The proper calculation is as follows:

Below two simple approaches to deal with this problem:

1. Implement your proportional risk strategy in your EA code


/* Variables */
double Pip,Lots,LotSize;
int StopLoss=100;
double Risk=2;

/* Define 1 Pip */ 
if(Digits==2 || Digits==4) Pip=1*Point; 
if(Digits==5 || Digits==3) Pip=10*Point; 
if(Digits==6) Pip=100*Point;  
	
/* Get new lot size */
Lots=GetLotSize(StopLoss);
	
/* GetLotSize function */	
double GetLotSize(int StopLossPips)
{
   /* Proportional risk management */
   LotSize = NormalizeDouble(((Risk/100)*AccountEquity()/StopLossPips) / (Pip/Point),2); 
   if(LotSize<MarketInfo(Symbol(), MODE_MINLOT)) LotSize=MarketInfo(Symbol(), MODE_MINLOT); 
   if(LotSize>MarketInfo(Symbol(), MODE_MAXLOT)) LotSize=MarketInfo(Symbol(), MODE_MAXLOT);
   return (LotSize);   
}

2. Use an online calculator as provided below:

There is one important thing that should be mentioned here. Trading using proportional lot sizes based on account balance, requires proper Risk:Reward ratio, that should be always smaller than 1:1! This means that Risk should always be slightly smaller than Reward. Let’s think about this for a minute, using a simple example below:
After 1 losing trade of 2% on a $10000 account using 200 pips StopLoss and 0.1 LotSize, the account balance will be equal to $9800. So to breakeven in the next “wining” trade (not including spread) we need to have a TakeProfit level set to: 204pips (R:R = 200:204 = 0.98), since 2% of $9800 is equal only to $196. Winning back 2% of the account balance after losing 2% is not enough to breakeven!

So that’s it! If you have any questions you can always mail me.

Greets,
Chris

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